Open AccessResponse of Market Returns to Inflation News: Asymmetry Based on the Level of Inflation
Author(s) -
Yasemin Ulu
Publication year - 2019
Publication title -
research in applied economics
Language(s) - English
Resource type - Journals
ISSN - 1948-5433
DOI - 10.5296/rae.v11i4.16118
Subject(s) - economics , inflation (cosmology) , recession , monetary economics , business cycle , stock (firearms) , stock market , keynesian economics , mechanical engineering , paleontology , physics , horse , theoretical physics , engineering , biology
Using daily data we look at S&P500 returns to inflation news during the period 1980-2002, where we categorize the data into sub-periods based on the level of inflation and the phase of economic cycle. We find that although stock market’s reaction to inflation news is generally negative, the response appears to depend on the level of prevailing inflation and phase of the business cycle. Specifically, we find that on the day of inflation announcement daily returns during periods of low inflation and low risks of recession respond positively to inflation news in recessionary states. Our results show that while high inflation weighs on market returns, low inflation creates positive returns opportunities when the economy faces low risks of recession. Asymmetric response of daily returns to inflation news depending on the level of inflation is an interesting novel finding.